Original Author: Michael Nadeau

Original Translation: Luffy, Foresight News

The next halving of the Bitcoin block reward will occur around April 8, 2024. Historically, halvings have triggered three remarkably similar cycles. In this article, we will break down the past three Bitcoin cycles and predict the next one.

The topics we will explore include:

• What drives the Bitcoin cycles?

• Operational and network KPIs of the first three cycles

• Price trends of the first three cycles

• Forecast of the next cycle

What drives the Bitcoin cycles

Every 210,000 blocks, the Bitcoin block reward is halved. On a time scale, halvings occur approximately every four years. It signifies a change in Bitcoin's monetary policy, reducing the block reward (network inflation) paid to miners by 50%.

In April next year, the Bitcoin block reward will decrease from 6.25 BTC per block to 3.125 BTC.

Due to the halving of newly issued supply, it is reasonable to conclude that the reduction in new supply acts as a catalyst for each bull market.

The theory goes like this:

After the halving, the amount of Bitcoin sold by miners to the market decreases. This reduces a significant portion of selling pressure. The price is at a threshold, and new buyers will push up the price. Then, financial media starts talking about Bitcoin, people start googling it, Bitcoin gains popularity rapidly, new buyers enter the market, on-chain activity picks up, venture capital firms invest in new businesses supporting the ecosystem. As a result, more businesses = more marketing = more users, which stimulates more buyers, more on-chain activity, and more media coverage.

Look, new all-time high.

This is a good story, but let's look at the data to see if it's true.

Net Position Change = The net change of Bitcoin held by wallet addresses marked as belonging to miners by Glassnode.

First Halving: According to Bitcoin's monetary policy, the annual new issuance decreased by 1,314,000. However, in the 12 months following the halving, miners' holdings of Bitcoin decreased by 4,458,603, more than twice the decrease in miners' Bitcoin holdings in the 12 months before the halving. In 2013, as the price of Bitcoin rose, miners sold a large amount of Bitcoin. In the first halving cycle, over 8 million Bitcoins were lost from miner's hands. With Bitcoin prices at lower levels, buyers dominated the market.

Second Halving: Within 12 months after the halving, miners hold a lower amount of Bitcoin compared to the previous 12 months. Once again, the price trend is driven by buyers in the market. In the second cycle, over 5.4 million Bitcoins were transferred from miners.

Third Halving: The number of Bitcoins sold by miners after the halving is higher than the previous 12 months. However, the third cycle marks the first accumulation period for miners. We found that the net position increased by 93,000 Bitcoins in the past 6 weeks (starting from the fourth cycle).

The supply shock caused by miners selling less does not necessarily trigger a bull market. In fact, the amount of Bitcoins sold by miners within 12 months after the halving is higher than any other time in the cycle.

That being said, the halving narrative may attract new buyers, and the market can self-adjust. Therefore, even if the data contradicts the narrative, if people believe it to be true, it could be true. Markets are reflexive, especially the cryptocurrency market.

But this story has more to it...

Global Liquidity

You'll hear less and less mockery about Bitcoin's correlation with the global liquidity cycle, but this is where the data aligns with price trends.

Source: Federal Reserve, People's Bank of China, European Central Bank, Bank of Japan, International Monetary Fund

Global liquidity seems to have bottomed out towards the end of 2022, which also marks the bottom for Bitcoin and the S&P 500 index. In the beginning of this year, we saw a slight rebound in global liquidity. Bitcoin rose by 80%. The S&P 500 index rose by 15%.

In the United States, inflation has come to an end, and the Federal Reserve has paused interest rate hikes. Asset prices have risen since the beginning of the year and may continue for a while.

However, there are also some clouds looming, and monetary policy may undergo a shift.

In particular, $7 trillion of national debt will mature next year. These debts need to be refinanced/reissued to support fiscal spending. According to the Congressional Budget Office's updated data in May 2023, the projected deficit for the United States this year is $1.5 trillion.

Meanwhile, debt interest payments have become the second largest expense for the US government, totaling nearly $1 trillion annually.

Source: Federal Reserve FRED Database

In October, 43 million Americans will resume student loan repayments, with an average monthly rate of $503. According to a survey, 37% of borrowers say they need to cut back on other expenses. 34% say they can't afford the cost at all.

In addition, banks are still requesting to join the Federal Reserve's regular financing program:

Source: Federal Reserve FRED Database

Consumer credit card debt reaches a historic high of over $1 trillion:

Source: Federal Reserve FRED Database

Bank loan standards also indicate an upcoming economic downturn:

Source: Federal Reserve FRED Database

Lastly, the commercial real estate industry has over $1.5 trillion in debt that needs refinancing in the coming years. This is due to interest rates being at their highest levels since 2006. Additionally, office occupancy rates and valuations have declined due to remote work. To make matters worse, a team of analysts at Citigroup found that over 70% of commercial real estate office loans are held by regional banks.

These factors are expected to further pressure inflation downwards.

Currently, CPI inflation swaps are pricing in a 2% inflation rate as early as October of this year. The Federal Reserve projects an inflation rate of 1.3% within a year.

Connecting these dots:

The market price of Bitcoin is closely tied to liquidity. From the perspective of the United States, liquidity conditions seem to have bottomed out. We have heard the same situation in China and Japan. Europe is also in a similar situation. As the inflation rate returns to 2%, the global economy is expected to slow down.

At that point, the Federal Reserve will receive the green light to change its monetary policy.

This will open the floodgates for another round of quantitative easing. As for the timeline? We believe this will happen within the next few years.

This liquidity shift aligns with the Bitcoin halving cycle and the accompanying narrative.

Innovation Cycle: Operations and Network KPIs

Do you understand? The Bitcoin cycle depends on liquidity. But liquidity is not everything.

If we consider factors like network growth, we may gain some insights.

Liquidity + growth in network fundamentals + the right narrative = new price discovery.

The reflexivity of new price discovery = new VC funding. This will bring more development, more users, and further price discovery.

It is the flywheel that drives speculation, real capital formation, and economic development. It's messy, but it's happening.

Bitcoin's Network Fundamentals

The Bitcoin network has shown strength in nearly every metric we track. We'll list some below:

Non-zero wallet count: So far, we have seen stable growth in non-zero wallets in each cycle. Our prediction here is just an inference of last year's growth (currently at 47 million). Please note that this number does not represent all Bitcoin holders. Since the data is limited to on-chain wallets, it does not represent the millions of customers on exchanges.

Developers: With the introduction of Ordinals protocol, we have seen an increase in developer activity recently.

Hashrate: An indicator of network security and miner sentiment. Over the past two years, hashrate has tripled, indicating bullish sentiment among miners.

Long-term holder behavior: One of the most important metrics we track. The percentage of long-term holders and supply untouched for a year is currently at an all-time high. Throughout cycles, we observe investors and users typically entering during bull markets. They then learn more about Bitcoin and tend to become long-term holders. We can observe this from the growth of wallets with over 1 BTC, which has recently exceeded 1 million. With the growth of long-term holders, it lays the foundation for the next bull market, where buyers will eventually dominate the market.

Lightning Network: The Lightning Network is a second-layer scaling solution for Bitcoin. It allows for transactions at much lower costs compared to on-chain transactions. While still in its early stages, we can see a significant increase in transaction volume on the Lightning Network in recent years.

Other Catalysts

Coinbase sparked the bull market in 2013.

Ethereum provided fuel in 2017.

Microstrategy, Paul Todor Jones, Tesla, Block, Mass Mutual, etc., ignited the market in the previous cycle.

What about 2024/2025?

Approval of the BlackRock ETF would be a good start.

BlackRock has an impeccable reputation, with only one of the 500+ ETFs it has applied for failing.

In some ways, having the BlackRock name associated with an ETF is more meaningful than a Bitcoin spot ETF itself.

The BlackRock name matters to RIAs, which matters to asset managers, which matters to almost every investor on the planet.

In the past, representing client investment in Bitcoin might have exposed fund managers to career risk. The BlackRock ETF could completely change this scenario.

Some thought-provoking questions: What happens if the bigger risk is not allocating 1% of Bitcoin through reputable vehicles like the BlackRock spot ETF?

Price Behavior in Cycles and Predicting the Next Cycle

5 key points:

Seizing Market Opportunities: The best time to buy Bitcoin is when everyone thinks it's dead. We have two opportunities in 2022. In December, we reminded readers that Bitcoin was bottoming out. Secondly, what is the second best time to buy Bitcoin? Historically, it occurs during any downturn before the halving. Of course, seizing market opportunities is indeed difficult. The dollar-cost averaging strategy works well for assets like Bitcoin in the early stages of global adoption. Even those who bought at the previous cycle's peak have performed well in the long run. Bitcoin is currently down 55% from its historical high, but its 10-year, 7-year, 5-year, and 3-year compound annual growth rates are 84%, 73%, 36%, and 49%, respectively. The key is to have long-term belief. Know exactly what you're buying and ignore the noise.

Forecast: Based on the previous three cycles, we predict that the return rate will continue to decline. The target price for Bitcoin in this cycle is $158,000.

A Higher-Level Framework: We predict that the market capitalization peak of Bitcoin in the next cycle will reach $3.15 trillion (compared to $1.2 trillion in the previous cycle). This will make Bitcoin's market cap reach 25% of gold. Long-time readers know that we ultimately believe Bitcoin will reach and surpass the gold market (currently valued at $12.6 trillion).

Overall, we believe the total cryptocurrency market cap in the next cycle could soar to $8-10 trillion (compared to $3 trillion in the previous cycle). Ethereum, competitive L1s, and important infrastructure sectors may present interesting opportunities.

Post-Cycle Bottom: We expect Bitcoin's volatility to continue in the coming years. However, we anticipate that the volatility will decrease over time. Factors such as market size growth, more mature investors entering the field, mature market structures and products, new regulations, and less "Wild West" leverage will contribute to this outcome. Please note that Bitcoin, like a commodity, far exceeds its production cost in a bull market and then falls to (sometimes below) its production cost in a bear market.

About the Previous Cycle: We believe that the cycle did not reach its full potential due to China's mining ban. If you remember, at that time, Bitcoin price had just reached a historical high, Tesla had just purchased Bitcoin for its balance sheet, and Michael Saylor had bought billions of dollars' worth of Bitcoin through Microstrategy and media tours. We believe that without China's mining ban, Bitcoin could have surpassed $100,000. Due to the concentration of miners in mainland China (abundant cheap hydroelectric power), the ban ultimately led to miners being forced to sell and surrender.

KPIs for the Midterm of the Cycle

Narrow the scope and understand where we stand today compared to previous cycles.

Market Value / Realized Value:

Source: Glassnode

This indicator measures the ratio between the market price and the average price of each circulating Bitcoin. We exited the green zone in early 23, which historically has been a good entry point. In other words, we are still at relatively low levels.

Realized Value:

Source: Glassnode

Realized value represents the average price, i.e., the purchase price of each circulating Bitcoin. The current price is $20,323.34.

200-week Moving Average Heatmap:

Data Source: Look into Bitcoin

In 2022, Bitcoin broke below the 200-week moving average for the first time in its history and remained below it for approximately 9 months. Since then, Bitcoin has recovered, and the current price of the 200-week moving average is $26,665.

Conclusion

The adoption cycle of Bitcoin is mainly driven by global liquidity, network growth, and the narrative of halving supply shocks. These three elements seem to be well aligned.

The most important thing is to obtain approval for the Bitcoin spot ETF with the name of BlackRock within the next few months.